Chegg, Inc.

Greetings and welcome to Chegg, Inc.' 's fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tracy Ford, Vice President of Investor Relations, and ESG for Chegg. Thank you. You may begin.

Good afternoon. Thank you for joining Chegg's fourth quarter 2023 conference call. On today's call are Dan Rosenzweig, co-chairperson and CEO, and Andy Brown, chief financial officer. A copy of our earnings press release, along with our investor presentation, is available on our investor relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com slash media center. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the company. These forward-looking statements are subject to material risks and uncertainties. and could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's annual report on Form 10-K filed with the Security and Exchange Commission on February 21, 2023, as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.cheg.com. We also recommend you review the investor data sheet, which is also posted on our IR website. Now, I will turn the call over to Dan.

Thank you, Tracy, and welcome everyone to our 2023 Q4 earnings call. To start, I am pleased to announce the appointment of David Longo as our new Chief Financial Officer, effective February 21st, as Andy announced on the last call that he will be retiring. David has been our Chief Accounting Officer and Corporate Controller since coming to Chegg in 2021, and we look forward to his continued leadership in this new role. He is joining us on this call today, so welcome, David. Now back to the business at hand. Chegg had a good quarter and exceeded our expectations. The last few years have seen real challenges as we navigate the post-COVID world. Despite those challenges, it's actually an exciting time at Chegg, and I'm proud of the team and how they are navigating the complete reinvention of our company, leveraging the advancements in artificial intelligence and making it core to everything that we do. In less than a year, we redesigned our entire user experience, developed our own large language models, launched automated answering, built proprietary algorithms to optimize the quality and accuracy of our exclusive content, and we began to compete more aggressively for new customers around the world. While early, our packaging, pricing, and product strategy are yielding encouraging results for both students and our business. The process of embedding AI into every facet of Chick's platform is ongoing and iterative as we build a truly personalized learning assistant, a service that anticipates the student needs, adapts to their strengths and weaknesses, and supports them academically professionally, and personally. There are numerous ways we intend to aggressively market our new product experience because the data tells us that once a student tries us, they love us. Internationally, we focused our biggest effort on testing promotional pricing to convert the millions of students who have entered the funnel but did not yet subscribe. Additionally, we are building sharing into our service to increase word of mouth expanding our presence on TikTok and enhancing our SEO with increased questions from automated answers. Our business model benefits from more students asking more questions as we index those questions into search and other platforms to drive even more customers. Let me provide a little context. Since introducing automated answers in late December, we've seen a significant increase in the number of students asking new questions. as well as the number of questions per student. This is because our new automated service is delivering quality and accuracy almost immediately, which is a huge benefit to students. By building our own language models, along with our algorithms to check for quality, students can feel confident in what they are learning on Chegg and get support in real time. The impact has been immediate and significant. In January, Chegg's automated answers delivered more than 2.2 million solutions to students, which is three times the number of new questions asked and answered at the same time last year. Importantly, as we scale to ensure we meet our standards of accuracy and quality, we expect to launch the rest of our proprietary models by the end of Q1. These models are being trained on Chegg's data and we are leveraging our 150,000 subject matter experts to optimize their solutions for learning. In education, students cannot afford the illusion of accuracy to learn. They need it to be correct, immediate, and personalized. We believe this is what Chegg can uniquely do for students, and it's a huge competitive advantage over generic AI models. The overall benefit of our new service to students is enormous, and there's also significant benefits to Chegg. As the hype of AI dies down, leaders in their verticals like Chegg are taking control of their own destiny by building their own models, which allows for higher quality and lower cost. As an example, the cost to answer a new question using our own AI models is already more than 75% less expensive, and we believe it will continue to decline over time. This means we'll be able to serve more students at a lower cost for students. faster and in more subjects and languages. We are confident in the value of our new product, and because of that confidence and to be more competitive, we began testing promotional pricing in international markets in the middle of last year. We believe that if we could introduce our offerings to more global learners, they would find the value and benefit of Chegg and continue to choose us and stay with us. In Q4, We saw year-over-year new customer growth outside the U.S. for the first time in two years. And just as important for our business model, more of these users are taking the Chegg Study Pack, which is our higher-priced subscription, and remaining paying customers for longer periods of time. We developed this pricing and packaging to be revenue-neutral this year while we expand new account growth substantially. While it is still early, we are seeing encouraging results. Given the success of what we've seen internationally, We are now testing promotional pricing for new accounts in the U.S., which began in mid-January. As we have said, online learning support and skills-based learning are a huge market, and they are only getting bigger. AI is still in its infancy, and our product roadmap is ambitious and exciting. Throughout 2024, we are introducing more AI-driven capabilities, such as conversational chat which continues to layer in personalization and interactivity for our learners. We also plan to integrate personalized learning tools such as practice questions, flashcards, and study guides to our conversational learning experience. Looking beyond 2024, as AI automated translation gets better and cheaper, we plan to expand the localization of our offerings to non-English speaking users. We also plan to build out more AI capabilities within Chegg Skills and integrate pathways for students with assessments and other tools. We are already seeing a reduction in the time it takes to launch new skills programs by approximately 40%, which allows us to offer new courses at greater speeds and will significantly reduce our costs. And the importance of skills-based training has never been more critical. In fact, half of recent graduates are questioning how prepared they are to enter the workforce, given the disruption of artificial intelligence. And employers agree. as 79% say that workers need more training to work with AI more effectively. So the opportunity for Chegg skills has never been greater or more important. There are a number of exciting opportunities ahead of us in 2024, and we remain focused on the following priorities. Returning to new account growth globally. Maintaining strong margins in cash flow. Rolling out the next phase of Chegg's enhanced AI services. and leveraging our momentum and skills for continued growth. Every decade or so, the pace of technological innovation accelerates and new growth opportunities open up. The history of the Internet has shown us that vertical players who know their customer have reach, proprietary content, and can provide a personalized user experience will win and win big. Given the strength of our brand, with over 90% of our customers reporting they are satisfied with Chegg's service, We believe we are well positioned to do just that in our sector. Before I turn it over to Andy, I want to again thank him for all he has done for Chegg during his 12 and a half year tenure. Under his guidance, Chegg grew from a physical textbook rental business to a global online learning platform. When Andy took the job, Chegg was in debt, unprofitable, and we had a single business model, renting textbooks. Andy guided us through our transition to a fully digital business, and in doing so, grew our digital revenue from zero to over $700 million annually. In his final full year as our CFO, Chegg generated $222 million in adjusted EBITDA and $173 million in free cash flow. Thank you isn't enough to acknowledge the impact Andy has had on this company and on me personally. Andy, you leave quite a legacy at Chegg, and you will truly be missed. And with that, I will turn it over to you. Andy?